Category Archives: UK

Abstract: Energy transitions have led to major advances in human wellbeing. However, little evidence exists about the scale of the net benefits. By developing a new method for identifying the demand curve, and by using a unique, historical data set, this paper estimates the consumer surplus associated with heating, transport and lighting over more than two hundred years and identifies the gains from a number of key energy transitions. For certain energy transitions, the increase was dramatic, reflecting the transformations in society and lifestyles that mobility and illumination provided in the nineteenth and twentieth centuries. Yet, the net benefits related to heating technologies only rose modestly. Finally, due to saturation effects of the demand for energy services, future technological developments and energy transitions may benefit consumers (though not necessarily society as a whole) less than those in the past.

The current research focus in energy transitions is mainly motivated by the environmental implications of energy consumption. This more than justified direction has relegated to a second place the analysis of the enormous benefits derived from energy transitions, specially when we observe consumers’ welfare. This new paper by Roger Fouquet analyses the positive impacts of energy transitions (hereafter, ET) by looking into how each ET generates consumer surplus.

Roger Fouquet

This paper combines data sets from two previous works of the author about the United Kingdom on service prices between 1300 and 2010 (Fouquet 2011a), and service consumption between 1700 and 2010 (Fouquet 2014). The data sources and methodologies used were explained in Fouquet (2008). In brief, Fouquet has done an upgrade of his former estimations to measure how much welfare we have obtained by ET. The author follows a standard measure of welfare (how less consumers pay for a specific service) and he applies it to each ET during the last two centuries in the United Kingdom.

Figure 1: Income Price Elasticity of Demand for Energy Services in the United Kingdom, 1800 – 2008

As shown in the examples in Figure 1, a key advantage of focusing on energy services, rather than on fuels (energy carriers), is that the demand for services remains comparable with the introduction of new goods and technologies.

Figure 2: Consumer Expenditure on Domestic Heating, Passenger Transport and Lighting as a share of GDP in the United Kingdom, 1800 – 2010

The conclusions extracted from the paper could be summarized as follows:

Attempts to estimate consumer surplus face enormous challenges, mainly by the effects of disruptive technologies. However, it could be possible to get an approximation taking into account the methodology used by Nordhaus (1997). Moreover, the paper presents a novel method that allows to identify the changes in demand curves for energy services (lightning, heating and transport).

There were dramatic increases in consumer surplus due to energy transition in transport (stagecoaches to railways) and lightning (candles to gaslight and to electric lightning).

Developing countries are benefited by increasing energy consumption. On the other hand, benefits in developed countries could be lower than in the past.

The method offered allow us to forecast the long-run net benefits of new energy technologies and transitions. This issue has enormous policy implications in relation with the environmental challenges that we are facing us.

Comment

Currently, to defend energy systems/consumption as mechanisms of progress and development is quite complicated, specially if the energy systems contain fossil fuels, such as the main energy carriers in the case of the United Kingdom. This paper focuses its attention on the “good side” of energy consumption and mechanization, tackling a compulsory debate on the trade-off between economic development and sustainability. Roger Fouquet has mentioned this debate in an 2016 article, where he analyzed the lessons from history to our current energy transition. Now, Fouquet has demonstrated, accounting for the consumer surplus, than previous energy transitions have been beneficial for consumers/population. The question is: how should the current and future energy transition be carried? In order to achieve economic development, countries pursuing higher income levels require an increase in energy consumption. Fossil fuels still are a valid option to increase energy consumption; a low carbon economy could be farther in the road than we thought. A challenge to global society is to create an economic environment favorable to clean energy technologies, in order to promote economic growth in low income regions without the deprivation of our natural resources and environment.

As this paper has shown us, there are periods when the increase in energy consumption has been beneficial to aggregate welfare, at least from a country/region perspective. However, the current global situation doesn’t allow an increase in energy consumption based in fossil fuels without risking main environmental equilibriums.

The only possible criticism to the paper is the implicit “normative” scope supported by one country experience. Nevertheless, Fouquet presented this paper as a starting point for further research.

References

Fouquet, R. (2011a) “Divergences in Long Run Trends in the Prices of Energy and Energy Services.” Review of Environmental Economics and Policy 5(2) 196-218.

Abstract: British general incorporation law granted companies an extraordinary degree of contractual freedom. It provided companies with a default set of articles of association, but incorporators were free to reject any or all of the provisions and write their own rules instead. We study the uses to which incorporators put this flexibility by examining the articles of association filed by three random samples of companies from the late nineteenth and early twentieth centuries, as well as by a sample of companies whose securities traded publicly. Contrary to the literature, we find that most companies, regardless of size or whether their securities traded on the market, wrote articles that shifted power from shareholders to directors. We find, moreover, that there was little pressure from the government, shareholders, or the market to adopt more shareholder-friendly governance rules.

Review by John Turner (Centre for Economic History, Queen’s University Belfast)

Tim Guinnane, Ron Harris and Naomi Lamoreaux are three scholars that every young (and old) economic historian should seek to emulate. This paper showcases once again their prodigious talent – there is careful analysis of the institutional and legal setting, a lot of archival evidence, rigorous economic analysis, and an attempt to understand how contemporaries viewed the issue at hand.

In this paper, Guinnane, Harris and Lamoreaux (GHL) examine the corporate governance of UK companies in the late nineteenth and early twentieth centuries. The UK liberalised its incorporation laws in the 1850s and introduced its first Companies Act in 1862. From a modern-day perspective, this Act enshrined very little in the way of protection for shareholders. However, the Appendix to the 1862 Companies Act contained a default set of articles of association, which was the company’s constitution. This Appendix, known as Table A, provided a high level of protection for shareholders by modern-day standards (Acheson et al., 2016). However, the majority of companies did not adopt Table A; instead they devised their own articles of association.

The aim of GHL’s paper is to analyse articles of associations in 1892, 1912 and 1927 to see the extent to which they shifted power from shareholders to directors. To do this, GHL collected three random samples of circa 50 articles of association for 1892, 1912 and 1927. Because most (if not all) of these companies did not have their securities traded on stock markets, they also collected sample of 49 commercial and industrial companies from Burdett’s Official Intelligence for 1892 that had been formed after 1888. However, only 23 of these companies had their shares listed on one of the UK’s stock exchanges.

GHL then take their samples of articles to see the extent to which they deviated from the clauses in Table A. Their main finding is that companies tended to adopt governance structures in their articles which empowered directors and practically disenfranchised shareholders. This was the case no matter if the company was small or large or public or private. They also find that this entrenchment and disenfranchisement becomes more prominent over time. However, GHL unearth a puzzle – they find shareholders and the market appeared to have been perfectly okay with poor corporate governance practices.

How do we resolve this puzzle? One possibility is that shareholders (and the market) at this time only really cared about dividends. High dividend pay-out ratios in this era kept managers on a short leash and reduced the agency costs associated with free cash flow (Campbell and Turner, 2011). Interestingly, GHL suggest that this may have made it more difficult for firms to finance productivity-enhancing investments. In addition, they suggest that the high-dividend-entrenchment trade-off may have locked in managerial practices which inhibited the ability of British firms to respond to future competitive pressures and may ultimately have ushered in Britain’s industrial decline.

Another solution to the puzzle, and one that GHL do not fully explore, is that the ownership structure of the company shaped its articles of association. The presence of a dominant owner or founding family ownership would potentially lessen the agency problem faced by small shareholders. In addition, founders may not wish to give too much power away to shareholders in return for their capital. On the other hand, firms which need to raise capital from lots of small investors on public markets may adopt more shareholder-friendly articles. The vast majority of companies in GHL’s sample do not fall into this category, which might go some way to explaining their findings.

A final potential solution is that the vast majority of firms which GHL examine may have raised capital in a totally different way than public companies, and this shaped their articles of association. These firms probably relied on family, religious and social networks for capital, and the shareholders trusted the directors because they personally knew them or were connected to them through a network. Indeed, we know precious little about how and where the multitude of private companies in the UK obtained their capital. Like all great papers, GHL have opened up a new avenue for future scholars. The interesting thing for me is what happens when private firms went public and raised capital. Did they keep their articles which entrenched directors and disenfranchised shareholders?

Unlike the focus of GHL on mainly private companies, a current Queen’s University Centre for Economic History working paper examines the protection offered to shareholders by circa 500 public companies in the four decades after the 1862 Companies Act (Acheson et al., 2016). Unlike GHL, it takes a leximetric approach to analysing articles of association. Acheson et al. (2016) have two main findings. First, the shareholder protection offered by firms in the nineteenth century was high compared to modern-day standards. Second, firms which had more diffuse ownership offered shareholders higher protection.

How do we reconcile GHL and Acheson et al. (2016)? The first thing to note is that most of Acheson et al’s sample is before 1892. The second thing to note is that in a companion paper, Acheson et al. (2015) identify a major shift in corporate governance and ownership which started in the 1890s – companies formed in that decade had greater capital and voting concentration than those formed in earlier decades. In addition, unlike companies formed prior to the 1890s, the insiders in these companies were able to maintain their voting rights and entrench themselves. This corporate governance turn in the 1890s is where future scholars should focus their attention.

Abstract: Populism may seem like it has come out of nowhere, but it has been on the rise for a while. I argue that economic history and economic theory both provide ample grounds for anticipating that advanced stages of economic globalization would produce a political backlash. While the backlash may have been predictable, the specific form it took was less so. I distinguish between left-wing and right-wing variants of populism, which differ with respect to the societal cleavages that populist politicians highlight. The first has been predominant in Latin America, and the second in Europe. I argue that these different reactions are related to the relative salience of different types of globalization shocks.

Populism has been at the front of news headlines for a while now. Whether it was the controversial campaign for Brexit led by Nigel Farage from the United Kingdom Independence Party (UKIP) and Boris Johnson from the Conservative Party in Great Britain, or the equally controversial campaign and victory of Donald Trump in the recent United States elections, the rise of anti-immigrant and anti-European political parties in countries like France, Greece, and Spain, the so called “anti-imperial Castro-Chavist” movements and governments in Venezuela, Bolivia, and Ecuador, or the opposition of the Democratic Center Party (a right-wing political agrupation led by ex-president Alvaro Uribe Velez) to the peace treaty in Colombia, populism is back and very strong, and according to the author, it is here to stay for the foreseeable future.

Dani Rodrik combines the use of economic history and economic theory to analyze the recent surge of these populist movements across Europe and America (see a blog-post version of the paper on VOX here). The main argument of the paper is that “advanced stages of globalization are prone to populist backlash” and the specific form populism takes will depend on the different societal cleavages that politicians can exploit to promote anti-establishment movements. There will be a tendency for left-wing populism when “globalization shocks take the form of trade, finance, and foreign investment”. The opposite will happen when “the globalization shock becomes salient in the form of immigration and refugees”.

Rodrik first presents a rather short summary of what economic history has to say about the appearance of populism during the first globalization era. He points out to the abolition of the Corn Laws in Britain in 1846 as the origin of a series of commercial treaties that, combined with the Gold Standard and free mobility of capital and people, made the world almost as globalized as it is today. Nonetheless, the decline of agricultural prices in the 1870s and 1880s motivated an increase in agricultural tariffs in almost all of Europe, and later on, the United States instituted a series of acts to reduce immigration from several countries. Moreover, Rodrik argues that the first self-consciously populist movement appeared in the US during the 1880s, with the farmers’ alliance against the Gold Standard, bankers and financiers.

The author moves on to analyze the effects of trade on redistribution. Based on the theorem developed by Stolper and Samuelson (1941), Rodrik argues that in most international economic models where trade does not lead to specialization, “there is always at least one factor of production that is rendered worse off by the liberalization of trade. In other words, trade generically produces losers”. Moreover, he argues that the net profits of trade openness decrease relatively to the redistribution costs, as the initial barriers to trade are lower. He backs this argument with empirical evidence from the literature on NAFTA and the US trade with China, and a model that looks at the effect of the size of the initial tariff being removed on the change in low-skill wages and the increase in real income of the economy.

Rodrik also argues that although there could be a form of compensation for the affected industries, this is usually very costly and not practical. Also, one of the reasons why populist movements in Europe have not been anti-trade might be the existence of safety nets that made unnecessary ex-post mechanisms of compensation. Very important as well is the general perception of the masses on the degree of fairness of the increase in inequality perceived after reducing trade tariffs. Namely, populism is more likely to appear when the losses derived from globalization and increases in inequality are deemed to be produced by a group taking unfair advantage of the new economic atmosphere.

The author also analyzes the perils of financial globalization, whereby looking at the current literature of the effects of capital mobility on inequality, he concludes that countries prefer when capital adopts the form of a long-term flow, like direct foreign investment, rather than short-term, volatile financial flows. Rodrik comments that the literature has found that financial globalization tends to increase the negative impact of low-quality domestic institutions. There is also a high correlation presented by Reinhart and Rogoff (2009) between capital mobility and the incidence of banking crises.

The article concludes with an analysis of the possible determinants of the specific type of populism that spreads in a given country. In a different paper (Mukand and Rodrik, 2017) Rodrik presented a model that could explain to some extent the reason why populist movements in Europe have traditionally been right winged, whereas in Latin America they have been usually left winged. The main determinants in the model were the presence of an ethno-national/cultural or an income/social cleavage. Rodrik also provides empirical evidence of this phenomenon with a newly constructed dataset.

Comments

During my training as an economist I was well aware of the distributional effects that trade has on the economies involved. Nonetheless, the argument I heard was always that trade is a positive-sum game and net profits from it could be redistributed among the losers, thus alleviating any negative effects. The usual argument to explain why trade openness was sometimes not so popular was that the potential losers from trade were better represented and had more lobbying power, thus preventing tariff reductions. As Rodrik argues in this paper, sometimes, especially at advanced stages of globalization, not only are there problems redistributing the potential net profits; it looks as the net effects of opening more the economy at this stage might be actually negative.

This paper comes out at a moment when academics, politicians, the media, and the general public are trying to understand the reasons why these movements have appeared somewhat all of a sudden. Rodrik’s argument is that these events were predictable. The implications of the development of a particular form of populism on economic welfare are still not clear yet: analyzing this could be one of the lines of future research opened by this paper. Very often populism is associated with demagoguery, and it will be very important to differentiate between the two in the future. It is not the same that an anti-corrupt-establishment movement aims to change the political structure of a country, than filling the public opinion with lies and false promises as it happened with Brexit in the UK and with the peace treaty referendum in Colombia. In the former, the Leave campaign promised to the general public that the resources spent on the EU could be directly transferred to funding the National Health Service, which turned out to be a false statement. In the latter, leaks of recordings from the campaign opposing the peace treaty clearly showed how different socio-economic groups were fed different false arguments to gain their sympathy.

Finally, the paper shows the relevance of economic history for the discussion of present problems. Rodrik uses economic history to acknowledge that populism has sprung in the past at advanced stages of globalization. Following his example, economic historians should contribute to the literature by further explaining the channels through which populism has developed, to help us understand which are the consequences of different types of populism on economic development and societal welfare.

Abstract Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon. To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974. The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all contributed to the largest single loss of any British bank to that time. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system.

Review by Adrian E. Tschoegl (The Wharton School of the University of Pennsylvania)

Since the 1974 rogue trading scandal at Lloyds’s Lugano branch we have seen more spectacular sums lost in rogue trading scandals. What Dr Catherine Schenk brings to our understanding of these recurrent events is the insight that only drawing on archives, both at Lloyds and at the Bank of England, can bring. In particular, the archives illuminate the decision processes at both institutions as the crisis unfolded. I have little to add to her thorough exposition of the detail so below I will limit myself to imprecise generalities.

Marc Colombo, the rogue trader at Lloyds Lugano, was a peripheral individual in a peripheral product line, in a peripheral location. As Schenk finds, this peripherality has two consequences, the rogue trader’s quest for respect, and the problem of supervision. Lloyds Lugano is not an anomaly. An examination of several other cases (e.g. Allied Irish, Barings, Daiwa, and Sumitomo Trading), finds the same thing (Tschoegl 2004).

In firms, respect and power come from being a revenue center. Being a cost center is the worst position, but being a profit center with a mandate to do very little is not much better. The rogue traders that have garnered the most attention, in large part because of the scale of their losses were not malevolent. They wanted to be valued. They were able to get away with their trading for long enough to do serious damage because of a lack of supervision, a lack that existed because of the traders’ peripherality.

In several cases, Colombo’s amongst them, the trader was head of essentially a one-person operation that was independent of the rest of the local organization. That meant that the trader’s immediate local supervisor had little or no experience with trading. Heads of branches in a commercial bank come from commercial banking, especially commercial lending. Commercial lending is a slow feedback environment (it may take a long time for a bad decision to manifest itself), and so uses a system of multiple approvals. Trading is a fast feedback environment. The two environments draw different personality types and have quite different procedures, with the trading environment giving traders a great deal of autonomy within set parameters, an issue Schenk addresses and that we will discuss shortly.

Commonly, traders will report to a remote head of trading and to the local branch manager, with the primary line being to the head of trading, and the secondary line being to the local branch manager. This matrix management developed to address the problem of the need to manage and coordinate centrally but also respond locally, but matrix management has its limitations too. As Mathew points out in the New Testament, “No man can serve two masters, for either he will hate the one, and love the other; or else he will hold to the one, and despise the other” (Matthew (6:24). Even short of this, the issue that can arise, as it did at Lloyds Luggano, is that the trader is remote from both managers, one because of distance (and often time zone), and the other because of unfamiliarity with the product line. A number of software developments have improved the situation since 1974, but as some recent scandals have shown, they are fallible. Furthermore, the issue still remains that at some point the heads of many product lines will report to someone who rose in a different product line, which brings up the spectre of “too complex to manage”.

The issue of precautionary or governance rules, and their non-enforcement, is a clear theme in Schenk’s paper. Like the problem of supervision, this too is an issue where one can only do better or worse, but not solve. All rules have their cost. The largest may be an opportunity cost. Governance rules exist to reduce variance, but that means the price of reducing bad outcomes is the lower occurrence of good outcomes. While it is true, as one of Schenk’s interviewees points out, that one does not hear of successful rogue traders being fired, that does not mean that firms do not respond negatively to success. I happened to be working for SBCI, an investment banking arm of Swiss Bank Corporation (SBC), at the time of SBC’s acquisition in 1992 of O’Connor Partners, a Chicago-based derivatives trading house. I had the opportunity to speak with O’Conner’s head of training when O’Connor stationed a team of traders at SBCI in Tokyo. He said that the firm examined too large wins as intently as they examined too large losses: in either case an unexpectedly large outcome meant that either the firm had mis-modelled the trade, or the trader had gone outside their limits. Furthermore, what they looked for in traders was the ability to walk away from a losing bet.

But even small costs can be a problem for a small operation. When I started to work for Security Pacific National Bank in 1976, my supervisor explained my employment benefits to me. I was authorized two weeks of paid leave per annum. When I asked if I could split up the time he replied that Federal Reserve regulations required that the two weeks be continuous so that someone would have to fill in for the absent employee. Even though most of the major rogue trading scandals arose and collapsed within a calendar year, the shadow of the future might well have discouraged the traders, or led them to reveal the problem earlier. Still, for a one-person operation, management might (and in some rogue trading scandals did), take the position that finding someone to fill in and bring them in on temporary duty was unnecessarily cumbersome and expensive. After all, the trader to be replaced was a dedicated, conscientious employee, witness his willingness to forego any vacation.

Lastly, there is the issue of Chesterton’s Paradox (Chesterton 1929). When a rule has been in place for some time, there may be no one who remembers why it is there. Reformers will point out that the rule or practice is inconvenient or costly, and that it has never in living memory had any visible effect. But as Chesterton puts it, “This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable.”

Finally, an issue one needs to keep in mind in deciding how much to expend on prevention is that speculative trading is a zero-sum activity. A well-diversified shareholder who owns both the employer of the rogue trader and the employers of their counterparties suffers little loss. The losses to Lloyds Lugano were gains to, inter alia, Crédit Lyonnais.

There is leakage. Some of the gainers are privately held hedge funds and the like. Traders at the counterparties receive bonuses not for skill but merely for taking the opposite side of the incompetent rogue trader’s orders. Lastly, shareholders of the rogue traders firm suffer deadweight losses of bankruptcy when the firm, such as Barings, goes bankrupt. Still, as Krawiec (2000) points out, for regulators the social benefit of preventing losses to rogue traders may not exceed the cost. To the degree that costs matter to managers, but not shareholders, managers should bear the costs via reduced salaries.

When Britain turned inward: Protection and the shift towards Empire in interwar Britain

By Alan de Bromhead (Queen’s University Belfast), Alan Fernihough (Queen’s University Belfast), Markus Lampe (Vienna University of Economics and Business) and Kevin Hjortshøj O’Rourke (University of Oxford)

International trade became much less multilateral during the 1930s. Previous studies, looking at aggregate trade flows, have argued that discriminatory trade policies had comparatively little to do with this. Using highly disaggregated information on the UK’s imports and trade policies, we find that policy can explain the majority of Britain’s shift towards Imperial imports in the 1930s. Trade policy mattered, a lot.

Reviewed by Mark J Crowley

This paper provides an interesting insight into tariffs, and their role in interwar Britain from a perspective that has not been previously examined. An examination of this issue is timely, especially with the debates surrounding the implication of Britain’s withdrawal from the European Union, and the threats issued by the American Trump administration concerning future trade policy. It demonstrates that the impact of tariffs during the economic crises of the 1930s had a variable impact, and did not always achieve their intended outcome. In this respect, the impact of punitive trade policies from a historical perspective can provide a very important context to future negotiations as the world becomes acclimatised to a very different political landscape.

Tariff reform was a huge issue for the British government in the early twentieth century, and the subject of significant political propaganda.

The paper is deeply researched, and draws on a wide collection of data. One of the main conclusions is that trade blocs made very little difference, nor did the imperial preference scheme, to the balance and nature of the British economy in the crisis years. However, it does show that the change in the nature of trade, away from free trade to focusing specifically on empire did have specific outcomes that shaped the direction of the British economy, but that these changes were caused specifically by trade policy rather than anything else. Indeed, the authors show that as a result of the changing nature of the British government’s trade policy, a 70% increase in empire trade was reported in the period 1930-33. In this respect, the paper poses a very interesting question that is addressed, but will need further historical enquiry: Did trade policy contribute to return of intra-Imperial trade?

The paper looks at a range of policies pursued by the British government in the period after the First World War, some of which were discriminatory, in order to evaluate the nature of its economic and trade development. In compiling their conclusions, a huge amount of data was analysed, including data sets from 42 countries examining 200 products categories between 1924-1938. The data showed that dramatic changes were seen in the nature of Britain’s trade and economic policy in the period 1931-33. Nevertheless, these changes had long roots. The abolition of free trade after the First World War saw the introduction of the McKenna Duty, which imposed a 33.5% tariff on cars, clocks, watches, films and musical instruments ad valorem (based on the value of the goods). This was later intensified with the implementation of the 1921 Safeguarding of Industries Act, where a 33.5% tariff was placed on the imports of key goods. However, despite the apparent punitive nature of these policies, the British economy was largely Liberal up to 1930, when the Abnormal Importations Act allowed 100% tax on all manufactured goods from outside the empire.

Utilising goods from the empire was seen as an excellent opportunity for the British government to stablilise its economy during the challenges of the Great Depression.

Realising the potential difficulties that such a punitive law could unleash, a more compassionate deal was reached in the 1932 Import Duties Act, where it was agreed that a 10% tax be imposed on imported goods, although this exempted products from the empire. This concession was achieved with the aim of ensuring improved access to dominion markets, and resulted in several bilateral agreements with Canada, Australia, New Zealand, South Africa, Newfoundland, India and Southern Rhodesia. Nevertheless, with the introduction of quotas for agricultural products through the Agricultural Marketing Acts of 1931 and 1933, there were now restrictions on the type of farming products that could be imported. Moreover, in a tone that is reminiscent of the pro-Brexit camp both during and after the referendum, the British explored deals that went beyond the traditional confines of Europe in order to strengthen its economy, and this included Scandinavian countries and Argentina. This not only improved British trade prospects, but provided the mutually-beneficial element to these countries in order to maintain access to the British market for the purpose of trade.

The 1932 Import Duties Act was seen by many as symbolic of punitive protectionist policies pursued by the British government.

Critique

There are so many fantastic elements to this paper that not only shed new light on the issue of tariffs, but also provide the foundation for future debate. Nevertheless, the authors have highlighted what they believed were the difficulties in their research, especially concerning the masses of data that they collected. They believed that there were inconsistencies in the data, but have done a wonderful job in using spreadsheets to predict the results in the absence of concrete data. In some cases, the use of complicated mathematical formulas has been used to come to these conclusions. The fact that the paper engages in counterfactual debate provides an important foundation for future discussion, but also lends itself to its own difficulties. Counterfactuals, although interesting, cannot be definitively proven. In this respect, the paper poses several “what if” questions relating to tariffs, especially what would have happened if tariffs had not been increased. In their conclusions, they argue that it appears that the empire did better with tariffs than without, and if there was free trade, there would only have been a modest increase in the empire share of trade. Thus, the impact of British protectionist policies proved substantial, and, they argue, account for a shift of around 50% of trade towards the empire by 1930. The conclusions are interesting and useful, but as the authors explain, a lot of work needed to be done to fill the gaps in the data. It is the interpretation of these gaps in the data, especially the ways in which some conclusions have been reached through the use of counterfactual debate that will undoubtedly provide the platform for future historical enquiry on this topic.

References

Eichengreen, Barry, and Douglas A. Irwin. The slide to protectionism in the Great Depression: Who succumbed and why?. No. w15142. National Bureau of Economic Research, 2009.

Abstract: Since the 1970’s, both politically and theoretically, neoliberalism as an ideology has been on a persistent rise to the point where, in the twenty first century, it has garnered hegemonic dominance. Despite several recurring crises in countries since the ascendance of neoliberalism, we yet remain reluctant to point out the political economy philosophy as a root cause of the crises. Instead, many of the academics within Economics prefer to offer bouts of highly technical reasons for the downturn – this is especially true and almost solely applicable to those who practice within the ‘neoclassical’ conjecture of Economics. In a typical Marxian sense, one would have to look no further than the economic system to determine both economic and social outcomes of a country. What dictates that economic system however is the political philosophy of the leaders who guide the economic system – the policy makers. This paper attempts to show the neoliberal political philosophy, as the common thread for major crises within the last two decades. It also proposes a societal trinity for which change is driven through complex interactions among the political, economic and social spheres.

Revised by: Stefano Tijerina

Richard Rambarran joins an emerging group of scholars that are spearheading an aggressive global criticism of modern capitalism, and particularly the impact that neoliberalism has had on its most recent methods of implementation within the international system. Thomas Picketty’s Capitalism in the Twenty-First Century has lead the way in recent times. Nevertheless Rambarran’s contribution to the discussion is welcomed because it points out that the economic political philosophy behind the social construction of neoliberal ideals is the determinant factor in preserving <status quo, even after numerous economic crises.

From Rambarran’s point of view, the neoliberal principles have become an “ingrained” ideology fomented by economists, local politicians and bureaucrats, domestic and multilateral institutions, academic institutions, mass media, corporations, and the consumer.[1] He further argues that today’s mainstream professional economist has perpetuated this social construction using its mathematical and econometric technical rhetoric to distance itself not only from the public sphere but also from the critical role once played by the “Classical economists.”[2] The complacency in the professional sphere has permeated the public sphere, where the collective political and social conscience is more concerned in pursuing the possibility of “wealth and great opulence,” occasionally reacting to economic crises like the one in 2008 only to quickly return to the initial passive approach once individual financial issues are partially resolved.[3]

Rambarran centers on the 1997 East Asian crisis and the 2008 Global Financial Meltdown in order to illustrate how the economic political philosophy has come to dictate “the very mechanics of our lives” through its systemic and institutional framework. He argues that contrary to the views of many scholars that the rise of neoliberalism came with the emergence of political leaders Ronald Reagan and Margret Thatcher, the foundations of the political philosophy and its social construction emerged in the post Great Depression era.[4] The solutions to the 1997 and 2008 crises therefore represent a series of theoretical models constructed since the first modern global financial crisis in order to scientifically justify the perpetuation of neoliberalism.

‘Well what a coincidence! I’m a financial regulator too!’

The ingrained idea that “human well-being and social welfare” are best advanced by the deregulation of the institutions, programs, and norms that once regulated the capitalist machine, seems to be an unquestionable thought. [5] To get to this social reality, argues Rambarran, classic liberal ideas of John Locke, Adam Smith, David Ricardo and the like had to be dismantled in order to neoliberalism to surge. According to Rambarran, neoliberalism is “not simply a minutely revised version of classic liberalism,” it is a new version of capitalism that reduces the role of the state to its minimal.[6] The business-government alliance that pushed neoliberalism forward after the 1930s slowly twisted the idea that “liberating individual and entrepreneurial freedoms and skills” through institutions, programs, and a normative systems “characterized by strong private property rights, free markets, and free trade” were actually responsible for the debacle of the market system in 1997 and 2008, and that greater privatization of services and deregulation for the business sector was the only solution moving forward.[7] These are the principles of nation state building under globalization, the basic political economic structures of nations that welcome open market and free trade, the minimal parameters for participating in the global market system; ideas that, as indicted by Rambarran, are part of the subconscious decision making dynamic between politicians, the private sector, and consumers.[8]

The current realities of this “macroscopic trinity” indicate that the business class, defined by Rambarran as the “intellectual class,” heavily influences political, economic, and social perceptions of nation building under a globalized system.[9] An intellectual class responsible for the cultural social construction of neoliberal principles that originated in the industrial world during the first half of the twentieth century and that began to spread across the developing world after the Second World War.

Neoliberal economists obsessed with breaking the chains of state regulatory systems and interested in returning to the deregulated conditions of the pre Great Depression era used theoretical models to debunk Keynesian economics.[10] During the 1970s and 1980s neoliberal principles became the formula for stagflation in the highly developed countries, and the remedy for the increasing external debt crisis across the developing world. The effective release of the forces of the market justified the dismantling of the social welfare state and the institutional and programmatic bodies that awarded citizens levels of accountability within the triangular dynamic of government-business-constituent relationships across the world. Nationalist development models based on Import Substitution Industrialization were dismantled and replaced by the principles of deregulation, privatization, and the strengthening of private property rights.

According to Rambarran, the implementation of the neoliberal experiment across the world produced mixed results, but the ability of the intellectual class to market success stories through its propaganda machine in order to justify the long-term preservation and expansion of neoliberal principles across the world gave birth to the Asian miracle.[11] Foreign direct investment and the “inflow of speculative money” would be the driving force behind the miracle, as capitalists in the industrial world shifted their production and manufacturing operations to newly unregulated regions of the world while at the same time taking advantage of the liberalization of capital accounts, escaping the already fragile regulatory systems in their own nation states, and setting the tone for the initial stages of accelerated “neoliberal globalization.”[12] Once the “speculative bubble…popped” foreign investors quickly pulled their money from the region, decreasing confidence in the East Asian region.[13] The neoliberal experiment had revealed the need for regulatory systems in order to impede the emergence of new unregulated speculative markets across the world under a more interdependent global market system, but the reshuffling of capital back into the industrial economies allowed the neoliberal propaganda system to quickly market the success of Free Trade zones.

Rambarran misses the opportunity to explain the historical developments that took place between the Asian crisis of 1997 and the 2008 Global Financial Crisis that pushed neoliberalism further into the collective subconscious. Discussions about the emergence of the Canada-United States Free Trade Agreement, the North American Free Trade Agreement, and the consolidation of the European Union would have allowed the author an opportunity to illustrate how neoliberal intellectuals engineered and marketed to their constituents the illusion of a globalized economy for the sake of the consumer and the domestic worker.

The author’s lack of historical evidence makes his argument less convincing. The 1997 and 2008 crises help illustrate how neoliberal forces are able to perpetuate their principles even after severe global economic, political, and social damage, but he is not able to explain how the intellectual forces within his “macroscopic trinity” were able to create the social cultural construction that turned neoliberalism into an unquestionable economic political philosophy.

For example how neoliberal economists such as Milton Friedman and Lauchlin Currie together with multilateral organizations engineered the expansion of neoliberalism to markets across the world. How marketing and public relations intellectuals such as Philip Kotler and Daniel Edelman perfected the use of mass media in order translate the principles of neoliberalism to consumers, distancing them from their role as constituents and shifting their agency toward the world of consumption. How the roles of politicians and bureaucrats was redefined by Thatcher and Reagan in order to reinvent the democratic relationship between representative and constituent, and how the educational system at all levels was reengineered in order to replicate and export neoliberal ideals across the world.

A more detailed explanation of the concepts behind his “social trinity” would have clarified the dynamics between the intellectual class, and political, economic, and social actors. Why is there a one-way communication dynamic between economic actors and society? Why is the communication between political and economic actors a one-way dynamic? And why is the intellectual class not present within the political, economic, and social realms but separate from them? I would argue that the success of the expansion of neoliberal thought is that they now represent government, economic policy, and the collective social conscience. It is why it is more prevalent then ever before to see private sector representatives running for office, managing government institutions, and redefining the nature of once sacred social institutions such as universities. It is not a phenomenon of the industrial world but a common trend across the global system.

Harvey, D. A Brief History of Neoliberalism. London, United Kingdom: Oxford University Press, 2007.

Rambarran,R. “Crisis without End: Neoliberalism in a Globalized Environment Modeling the Historic Rise of Neoliberalism and its Systematic Role in Recent Economic Downturns,” Munich Personal RePEc Archive, October 22, 2015.

Abstract: Although Japanese economic growth after the Meiji Restoration is often characterised as a gradual process of trend acceleration, comparison with the United States suggests that catching-up only really started after 1950, due to the unusually dynamic performance of the US economy before 1950. A comparison with the United Kingdom, still the world productivity leader in 1868, reveals an earlier period of Japanese catching up between the 1890s and the 1920s, with a pause between the 1920s and the 1940s. Furthermore, this earlier process of catching up was driven by the dynamic productivity performance of Japanese manufacturing, which is also obscured by a comparison with the United States. Japan overtook the UK as a major exporter of manufactured goods not simply by catching-up in labour productivity terms, but by holding the growth of real wages below the growth of labour productivity so as to enjoy a unit labour cost advantage. Accounting for levels differences in labour productivity between Japan and the United Kingdom reveals an important role for capital in the catching-up process, casting doubt on the characterisation of Japan as following a distinctive Asian path of labour intensive industrialisation.

Broadberry, Fukao, and Zammit focus our attention on productivity comparisons between the UK and Japan, departing from existing works on U.S.-Japan comparisons.

Summary

Broadberry, Fukao, and Zammit argue that previous authors such as Pilat’s reliance on a U.S.-Japan comparison to measure Japan’s productivity has greatly distorted our periodization of Japan’s economic growth (Pilat 1994). This was partly because like Japan, the U.S. grew very quickly between 1870 and 1950, and the effects of the Great Depression in the U.S. also blunted our perception of the relative stagnation of the Japanese economy between 1920 and 1950. By comparing the Japanese data with that of the UK, Broadberry, Fukao, and Zammit show that Japanese catch-up began in the late nineteenth century during the Meiji period, and stagnated in the interwar period before resuming again after the Second World War.

In contrast to Pilat, the authors find that manufacturing played an important role in Japanese growth not only after but also before the Second World War. Whereas strong U.S. improvements in manufacturing (the U.S. itself was undergoing catch-up growth vis-à-vis the UK) might have obscured our view of Japanese performance in these areas, comparison with the UK reveals that Japanese manufacturing performed strongly until 1920. In terms of methodology, Broadberry, Fukao, and Zammit emphasize their use of more than one benchmark for time series projections to provide cross checks, and they selected 1935 and 1997 as benchmarks.

One of the most intriguing aspects of the paper is the suggestion that capital played a crucial role in Japan’s experience of catch-up growth. The authors challenge the growing view among economic historians that Asia pursued a distinctive path of economic growth, based on a pre-modern “industrious revolution” (Hayami 1967) and labor intensive industrialization (Austin & Sugihara 2013) in the modern period. Broadberry, Fukao, and Zammit’s data (table 12) shows that across our period, Japan caught up with the UK not only in terms of labor productivity but also capital intensity. Crucially, “by 1979, capital per employee was higher in Japan than in the United Kingdom” (p17). The authors explain this phenomenon by observing that “capital deepening played an important role in explaining labour productivity growth in both countries, but in Japan, the contribution of capital deepening exceeded the contribution of improving efficiency in three of the five periods” (p18). Contrary to the view put forward by those in favor of labor-intensive industrialization, the authors argue, “Japan would not have caught up without increasing [capital] intensity to western levels” (p19).

The authors contend that capital played as important a role as labor in shaping Japan’s productivity growth.

Comment

This paper provides a valuable quantitative contribution to our knowledge of labor productivity in two countries that are highly important in studies on global economic history. The greater intensity of Japan’s external relations with the U.S. in the period after the Second World War has led to scholars’ greater interest in comparisons with the U.S., whereas as Broadberry, Fukao, and Zammit point out, the UK remains one of the main yardsticks in terms of productivity before the Second World War. In this respect, a comparison with the European experience is valuable, and offers a good quantitative basis for illustrating the character of Japan’s industrialization efforts in the period before the Second World War. The conclusion that manufacturing played a key role in Japan’s catch-up growth vis-à-vis the UK is consistent with the historical literature that has foregrounded manufacturing, and in particular exports to Asia, as the main driver of pre-WW2 Japanese economic growth.

What is more surprising in this paper, however, is the authors’ contention that capital was the primary factor in Japan’s productivity growth. The authors note that until 1970 Japan enjoyed lower unit labor costs vis-à-vis Britain largely because real wages were artificially repressed beneath the level of labor productivity. It was in the 1970s when Japan started seeing increases in real wages, and as a result its labor cost advantage disappeared until faster real wage growth in the UK in the 1990s (p15). In other words, the authors suggest that Japan’s export success was due not so much to improvements in labor productivity as it was to artificially low labor costs. While Japanese labor productivity growth was not exceptional except between 1950 and 1973, the contribution of capital deepening in Japan (2.29% and 1.32% for 1950-73 and 1973-90, as opposed to 0.67% and 0.58% for the UK; table 13) was on the whole greater or at least as much as that of the UK.

While few commentators would dispute the importance of capital in driving economic growth, it is unclear whether the data presented here sustains the conclusion that Japan did not follow a distinctive path of labor-intensive industrialization. The authors cite Allen’s paper on technology and global economic development (Allen 2012) to support their claim that western levels of capital intensity were necessary for productivity-driven growth that is characteristic of advanced industrial economies. While that latter point is well taken, aggregate measures of “capital intensity” do not on their own reflect the types of industries where capital (and other resources) is invested, or the manner in which labor is deployed either to create growth or to generate employment for reasons of political choice or social stability. In fact, proponents of the labor-intensive industrialization argument acknowledge that post-WW2 Japan witnessed a step-change in its synthesis of the labor and capital-intensive paths of industrialization, at the same time that Japanese industries often opted for relatively labor-intensive sectors within the spectrum of capital-intensive industries, such as consumer electronics as opposed to military, aerospace, and petro-chemical sectors (e.g. Austin & Sugihara 2013, p43-46).

Labor-intensive industrialization does not itself preclude high levels of capital investment, for example consumer electronics, which employs great numbers of individual workers.

The key arguments in labor-intensive industrialization are not the role of capital per se, but the constraints imposed by initial factor endowments (e.g. large populations) and the transferability of the model through national industrial policies and intra-Asian flows of ideas and institutions. Broadberry, Fukao, and Zammit do not challenge these core ideas in the model, and confine their critiques to labeling Japan’s technological policy breakthroughs as changes in “flexible production technology” (p. 19). Doing so ignores the basic fact that the balance between population and resources in Japan has little similarity to that in the West, either at the eve of the Industrial Revolution or in the present day. In other words, there is little inherent contradiction between the need for capital accumulation and the selection of industries that make better use of the capital and technology (e.g. “appropriate technology”, Atkinson & Stiglitz 1969 and Basu & Weil 1998).

Finally, it seems to me that basing a critique primarily on a comparative study of the advanced economies of the UK and Japan misses a broader point that labor-intensive industrialization is as much about exploring paths that have been overlooked or inadequately theorized because of our simplistic insistence on “convergence” in economic growth. From this angle, foregrounding the subtle but profound differences between successful models of economic development, e.g. the experience of Japan in East Asia, and dominant Western models seems to be at least as valuable as attempts to reproduce the “convergence” argument.